Who am I kidding?
I can't go an entire month without publishing anything here at Get Rich Slowly. I need to write. And judging from the feedback regarding my planned sabbatical, you folks want me to write! Tell you what, let's change the premise.
Instead of taking all of September off from publishing, I'll instead vow that for the next four weeks, I won't tackle any major articles. If there's something that I want to share and that thing can be shared in 20-30 minutes, I'll do it. This plan will serve the same objective -- freeing my mind to focus on the other tasks that need to get done around here -- while also giving me an outlet for my writing (and giving you something to read).
I'll admit it: There are times that I think everything that needs to be said about personal finance has been said already, that all of the information is out there just waiting for people to find it. The problem is solved.
Perhaps this is technically true, but now and then -- as this morning -- I'm reminded that teaching people about money is a never-ending process. There aren't a lot of new topics to write about, that's true (this is something that even famous professional financial journalists grouse about in private), but there are tons of new people to reach, people who have never been exposed to these ideas. And, more importantly, there's a constant stream of new misinformation polluting the pool of smart advice. (Sometimes this misinformation is well-meaning; sometimes it's not.)
Here's an example. This morning, I read a piece at Slate by Felix Salmon called "The Millionaire's Mortgage". Salmon's argument is simple: "Paying off your house is saving for retirement."
Now, I don't necessarily disagree with this basic premise. I too believe that money you pay toward your mortgage principle is, in effect, money you've saved, just as if you'd put it in the bank or invested in a mutual fund. Many financial advisers say the same thing: Money you put toward debt reduction is the same as money you've invested. (Obviously, they're not exactly the same but they're close enough.)
So, yes, paying off your home is saving for retirement. Or, more precisely, it's building your net worth.
But aside from a sound basic premise, the rest of Salmon's article boils down to bullshit.
Today's article is from Chad Carson, who writes about real estate investing (and other money matters) at Coach Carson. I've always been intrigued by real estate investing but overwhelmed by how much info available. I asked Chad if he'd be willing to write an article that would help me (and other GRS readers) understand the basics of real estate investing. This is the result.
I got started in real estate investing right after college. Because a young adult can basically sleep in a car if he has to (my 1998 Toyota Camry with cloth seats was comfortable), I had little to lose by launching a business. Unfortunately, as a Biology major, I also knew very little about business or real estate. But I did know how to hustle and to learn. That helped.
Slowly, I learned to find good deals and to resell them for a small markup of profit (a.k.a. wholesaling). I also learned to buy, fix, and flip houses for a bigger profit (a.k.a. retailing). After a few years, my business partner and I began keeping some rental properties because we knew that was the path to generating regular, passive income.
While my early business might sound like an exciting HGTV house-flipping show, it's not for everyone. I experienced radical ups and downs of cash flow, and there were many unpredictable outcomes. I learned a lot being a full-time investor, but there are actually easier ways to get started.
Most investors I know started with a full-time job. They became valuable at their job, earned good money, lived frugally, and started boosting their saving rate. With their extra savings, they began buying rental properties on the side.
I'm not saying you shouldn't begin as a real estate entrepreneur like I did -- you'll know if you're called to make that leap -- but if you currently have a non-real estate job and you're saving money, you're already going down the easiest path.
The next step is to learn how to invest that money profitably and safely. I personally think real estate investing is one of the best ways to do that. I'll show you why that's the case in the next section.
Why Real Estate Investing? Because It's Ideal!
I've yet to find a better way to describe the benefits of real estate than this. All you need to remember is the acronym I.D.E.A.L:
- Income. The biggest benefit of real estate is rental income. Even the worst rentals I find produce more income than a portfolio of other assets like stocks or bonds. For example, I often see unleveraged (no debt) returns of 5-10% from rental income. And with reasonable leverage, it’s possible to see these returns jump to 10-15% or higher. The dividend rate of the S&P 500, on the other hand, is only 1.99% as of 1/24/17. And the yield on a broad basket of US bonds as of the same date was only 2.41%.
- Depreciation. Our government requires rental owners to spread out the cost of an asset over multiple years (27.5 years for residential real estate). This produces something called a yearly depreciation expense that can “shelter” or protect your income from taxes and reduce your tax bill. (For more about this, check my article The Incredible Tax Benefits of Real Estate Investing over at Mad Fientist.)
- Equity. If you borrow money to buy a rental property, your tenant basically pays off your mortgage for you with their monthly rent. Trust me: Having somebody else pay your mortgage is a beautiful thing! Like a forced savings account, your equity in the property gets bigger and bigger over time.
- Appreciation. Over the long run, real estate has gone up in value about the same rate as inflation, roughly three to four percent a year. Combined with the three benefits above, appreciation can produce a very solid long-term return. But this passive style of inflation is not the whole story. Active appreciation is even more profitable. You get active appreciation when you force the value higher by doing something to the property, like with a house remodel or changing the zoning.
- Leverage. Debt leverage is readily available to buy real estate. This means your $100,000 of savings can buy five properties at $20,000 down instead of just one property for $100,000. Interest on this debt is deductible, so you also save on your taxes. (While this can be helpful, keep in mind that leverage also magnifies your losses if things go bad.)
These IDEAL benefits are core reasons to invest in real estate. But as a Get Rich Slowly reader, I think you'll appreciate another core real estate investing benefit: control!
Controlling Your Financial Destiny
I love J.D.'s message here at Get Rich Slowly: You are the boss of you! You can apply this lesson to so many parts of life, but it especially applies to your finances. Real estate investing fits very well with the GRS philosophy. Why? Because real estate gives you much more control than other more traditional investments.
I'm also a fan of low-cost index fund investing, for example, but do you have an impact on the returns of your stock portfolio? Not really. The 3500+ managers of the companies owned by the VTI total stock market index fund do impact your returns, but not you personally. You simply control when you buy, how much you buy, and when you sell.
But with a rental duplex, for example, your decisions directly affect its profitability (for better or worse!).
- You can buy in certain neighborhoods and ignore others.
- You can negotiate with your bank, with the seller, and with your vendors to get better prices.
- You can choose the property manager and the types of tenants who will ultimately produce the returns for your investment.
If this prospect of control excites you, then keep reading. But if your palms are clammy at the idea of hands-on investments, just focus on a different vehicle. That's okay. There are options for everyone in this big investing universe!
To make things manageable, we're going to break things down a little. As a baby, you learned to walk by taking tiny steps. You also fell down a lot, but with a diaper four inches from the ground, what's the harm?!
Well, you're no longer a baby. Financially you do have a lot to lose. Your family, your hard-earned savings, your plans for financial independence, and your pride would all suffer if you made bad investments.
I get that. And that's why we still need to take safe, baby steps. There'll be plenty of time to run and grow faster once you're more confident. But in the beginning, just strive to move forward steadily.
The seven baby steps below provide a simple path to follow. I've taken each of these steps personally. You can use them as a blueprint to help you move forward with your own real estate investments.
As you spend less and earn more, you'll begin to earn a profit and save more money. Maybe at first you'll have a few dollars per month in surplus. Eventually, however, you'll find that you're saving 10%, 20%, or even 50% of your everything you earn.
The average person spends his surplus on whatever wants come to mind. Instead of using the money to get ahead, he stays in the same place. Or, worse, he falls behind by taking on debt. A smart money manager puts her profit to use by investing for the future.
At first, you'll pursue short-term goals.
- If you're in debt, get out of debt. Destroying high-interest debt offers the best possible return for your money.
- Build a cash reserve. It's smart to have money in a savings account to cover short-term emergencies.
- Invest in yourself. Remember: the more you learn, the more you earn. Increase your skills and education. Update your wardrobe and improve your health. Become a better you.
- Pursue your personal mission: fund college funds for the kids, pay off the mortgage, start a business, spend a year in southeast Asia. Use money as a tool to improve your life.
After your near-term wants and needs are satisfied, it's time to look farther into the future, toward retirement and Financial Independence. You know what that means, right? It's time to invest in the stock market!
Investing doesn’t have to be difficult. If you keep things simple, you can invest yourself and receive reasonable returns — all with a minimum of work and worry.
First, lets look at what not to do.
The Worst Investor I've Ever Known
Allow me to introduce you to the worst investor I've ever known. His name is J.D. Roth:
That's right, I'm using myself as an example of what not to do when investing.
You see, for a long time I didn't understand how the stock market worked. I treated it as if it were a casino. I picked a stock, put all my money into it, and crossed my fingers. I took risky gambles hoping to strike it rich.
Unsurprisingly, I lost a ton of money.
In this week's installment of Get Rich Slowly Theater, we're going to look at a real-life money boss: Earl Crawley, a parking attendant from Baltimore. Mr. Earl (as he's known) was profiled on the PBS show MoneyTrack. Here's a six-minute segment about this super saver:
Mr. Earl has worked as a parking attendant for 44 years -- at the same parking lot! He's never made more than $12 per hour. He's never earned more than $20,000 in a year, yet he has a net worth over half a million dollars.
So much of financial success involves good habits practiced over long periods of time.
Yes, you can still have a positive impact on your financial future if you're starting late in life -- but if you're 59 years old and just beginning to think about financial freedom, you have a lot of work to do.
But if you're 19, you have an extra forty years to set yourself up for financial success. This extra time makes a ginormous difference!
Here's a new thing for me: Yesterday, I met with a friend to give her financial advice. Believe it or not, in the twelve years since I started Get Rich Slowly, nobody has ever asked me to sit down with them and review their budget and investments. Pamela is the first. (And because I forgot to ask her permission to share this info, for this article I am totally changing anything that might identify Pamela.)
I've known Pamela for almost six years. She cuts Kim's hair, and sometimes she cuts mine. She knows I write about money, but I don't think she's ever read anything I've written.
Pamela is 41. She's single. She owns her own business. She loves her work and she's happy with her life, but she's starting to think about the future. Is she saving enough? Will she have enough for retirement? What if she wants to buy a home? Is there anything about her budget that seems out of line? When she cut my hair last month, she asked if I'd be willing to sit down with her over coffee to look at her numbers.
One of the fundamental ideas I try to promote here at Get Rich Slowly is your savings ought to be invested for long-term growth. You ought to use the magic of compounding to create a wealth snowball.
Naturally, you want put your money into an investment that offers a reasonable return and acceptable risk. But which investment is best? I believe -- as do most financial experts -- that you're most likely to achieve high returns by investing in the stock market.
But why do so many people favor the stock market? How much does the stock market actually return? Is it really better than investing in real estate? Or Bitcoin? Let's take a look.
How Much Does the Stock Market Return?
In Stocks for the Long Run, Jeremy Siegel analyzed the historical performance of several types of investments. Siegel’s research showed that for the period between 1926 and 2006 (when he wrote the book):
- Stocks produced an average real return of 6.8%. "Real return" means return after inflation. Before factoring inflation, stocks returned about 10% annually.
- Long-term government bonds yielded an average real return of 2.4%. Before adjusting for inflation, they had a return of about 5%.
- Gold had a real return of 1.2%. "In the long run, gold offers investors protection against inflation," writes Siegel, "but little else."
My own calculations — and those of Consumer Reports magazine — show that real estate does worse than gold over the long term. (I come up with a real return of just under one percent.) Yes, you can make money with real estate investing, but it's far more complicated than just buying a home and expecting its value to soar. (It's important to note that returns on real estate are a contentious subject. This recent academic paper analyzing the rate of return on "almost everything" found that housing actually outperforms the stock market by a slight margin.)
Siegel found that stocks have been returning a long-term average of about seven percent for 200 years. If
you’d purchased one dollar of stocks in 1802, it would have grown to more than $750,000 in 2006. If you’d instead put a dollar into bonds, you’d have just $1,083. And if you’d put that money in gold? Well, it’d be worth almost two bucks — after inflation.
Investing for the first time is a lot like taking that plunge into a new activity - you are intimidated by everything you think you don't know and you don't want to appear clumsy in front of others. With the plethora of online brokerages, the opportunities for first-time investors are wide open. However, this wide variety of investment options means you do need to be educated before you begin. You don't want to put your money in the wrong hands when you start to invest.
Keith McGurrin, Certified Financial Planner and a lead financial planner at T. Rowe Price has some tips for newcomers.
When I told readers that January would be "back to basics" month at Get Rich Slowly, the number-one request I received was to write about how to invest.
Rather than scatter investing info throughout the month, I decided to collect the essentials into one mammoth article. Here it is: all you need to know about how to invest -- even if you're a beginner.
In writing this article, I tried not to bog it down with jargon and definitions. (I'm sure I let some of that slip through the cracks, though. I apologize.) Nor did I dive deep. Instead, I aimed to share the basic info you need to get started with investing.
What follows are eight simple rules for how to invest. And in the end, I'll show you how to put these rules into practice. First, let's dispel some popular misconceptions.
Investing isn't Gambling -- and It isn't Magic either
Investing scares many people. The subject seems complicated and mysterious, almost magical. Or maybe it seems like gambling. When the average person meets with his financial adviser, it's often easiest to sit still, smile, and nod.
One of the problems is that the investing world is filled with jargon. What are commodities? What's alpha? An expense ratio? How do bonds differ from stocks? And sometimes, familiar terms – such as risk – mean something altogether different on Wall Street than they do on Main Street.
Plus, we're bombarded by conflicting opinions. Everywhere you look, there's a financial expert who's convinced she's right. There's a never-ending flood of opinions about how to invest, and many of them are contradictory. One guru says to buy real estate, another says to buy gold. Your cousin got rich with Bitcoin. One pundit argues that the stock market is headed for record highs, while her partner says we're due for a "correction". Who should you believe?
Perhaps the biggest problem is complexity – or perceived complexity. To survive and seem useful, the financial services industry has created an aura of mystery around investing, and then offered itself as a light in the darkness. (How convenient!) As amateurs, it's easy to buy into the idea that we need somebody to lead us through the jungle of finance.
Here's the truth: Investing doesn't have to be difficult. Investing is not gambling, and it's not magic.
You are perfectly capable of learning how to invest. In fact, it's likely that -- even if you know nothing right now -- you can earn better investment returns than 80% of the population without any scammy tricks or expensive tips sheets.
Today, I want to convince you that if you keep things simple, you can do your own investing and receive above-average returns – all with a minimum of work and worry. Sound good? Great! Let's learn how to invest.